Daily analysis 14.09.2016:
Soon, investors will begin to dispose towards the FOMC meeting next week. The British labor market remains very strong. However, today's data is slightly worse than estimated. The zloty is weak, but its moving in a narrow range of fluctuations.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- No macroeconomic data that could significantly impact the analyzed currency pairs.
Discussion regarding Fed will return
We have almost an entire week without the official statements from the FOMC representatives ahead of us. However, this doesn't mean that there won't be a discussion regarding the Federal Reserve members action until next Wednesday. It's very likely that leading financial news agencies will start publishing economists' estimations regarding the Fed actions on Friday. Moreover, investment banks will probably present their strategies for the coming week on that day as well.
We will focus on the most significant elements today. The first market reaction will concern the decision regarding interest rates. In our opinion, they will remain unchanged. This is mainly a result of statements from the particular FOMC members. Only two or three out of ten representatives who have the right of vote would support rate hikes. However, it's possible that only Esther George would present a different view, just as it happened in July. This should be a relatively dovish information.
Another matter is what are the FOMC members expectations regarding a correct level of interest rates, which were presented in economic projections. Since we claim that rate hikes will not happen in September, this automatically means that estimations median will be reduced to only one hike this year.
However, it remains unknown how many out of seventeen Fed members (those with the right to vote, as well as those without it) would like to leave interest rates unchanged in 2016. We think that it will be two or three members at maximum. The market might interpret this as a confirmation of rate hikes in December. This would decrease slightly the dovish message.
However, it seems that the view of the entire FOMC on preferred interest rates path in 2017, will be most crucial information. The estimations from June were two rate hikes this year and three rate hikes next year. However, we cannot exclude that the Fed would want to show that the entire path of monetary tightening will be flat, despite an expected hike in December.
This impression would reduce the median of next year's hikes from three to two. As a result, the median for the end of 2017 would be reduced from 1.6% to 1.1%. In our opinion, this would be a sufficient signal to wear-off the USD. Moreover, investors would assume that this path may become flatter in the coming months, as it happened in the past.
However, if the above scenario does not come true and the FOMC consensus leaves the perspective of three hikes next year, the market will focus on Janet Yellen's press conference, as well as the nuances from the announcement. We think that the Fed would want to use the “dovish hike” strategy. This means that they would clearly suggest a monetary tightening this year, as well as a very mild pace of hikes in the next quarters. This information should be negative for the USD, at least in perspective of the forthcoming months.
British labor market
The British labor market seems to be in a very positive condition. The employment index against population in working age (16-64 years) is the highest in its history and is at the level of 74.5%. Moreover, the unemployment rate is at its lowest level since mid-2005 and is at the level of 4.9%. However, the market is trying to foresee the future events, rather than being focused on the current conditions.
Regarding this, the situation is not as positive. However, it's still far from more serious dangers. Jobless claims increased slightly faster than expected (2.4k vs 1.8k) and their decline in July was revised upwards by 5k. Moreover, an increase in non-bonus salaries went down from 2.3% y/y to 2.1% y/y.
Therefore, it's definitively still too soon to claim that Brexit may clearly deteriorate the situation in the British labor market, at least until the United Kingdom actually leaves the European Union. We should also not expect the Bank of England to refer negatively to the local labor market during the meeting tomorrow.
Zloty is weak, but stable
The situation of the Polish currency has not changed over past few hours. The zloty remains weak, but its stable. Moreover, it's also worth noting that these minor moves are quite inconsistent with the global sentiment. A slight strengthening of the PLN from yesterday was dissonant with a deterioration of worldwide sentiments, as well as with an increase in profitability of the American treasury bonds.
However, the base case scenario is that the EUR/PLN will remain near 4.35 by the end of the week. We continue to expect the euro to start returning to the 4.30 area next week, rather than going towards 4.40. Our estimations are mainly based on an assumption that the FOMC meeting would support the emerging markets, rather than harm them.
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